• The CPI jumped 0.9% in June, with the core CPI also up 0.9% over the month. A few categories experiencing strong demand and limited supplies coming out of the pandemic boosted inflation over the month.
  • Inflation as measured on a year-ago basis was at the highest levels in decades. However, this is overstated because of comparisons with the period of weak prices at the beginning of the pandemic.
  • Inflation will slow in the second half of 2021 as supply starts to catch up with demand.
  • With the current pickup in inflation due largely to one-time factors, the Federal Reserve is not expected to raise the federal funds rate until mid-2023.

The consumer price index for urban consumers jumped 0.9% in June from May, the biggest one-month increase since June 2008. The consensus expectation was for a 0.5% increase. The core CPI, excluding food and energy prices, was also up 0.9% over the month. This was the strongest one month of core inflation since the early 1980s. Overall CPI inflation was 0.6% in May, with core inflation at 0.7%.

Prices once again rose quickly for goods and services that are experiencing strong demand, but also supply disruptions, coming out of the pandemic. Used car and truck prices jumped 10.5% over the month, the biggest one-month gain ever (going back to 1953), after increases of 10.0% in April and 7.3% in May. The increase in used car prices alone accounted for more than one-third of overall inflation in June. New car prices were up 2.0% in June, lodging away from home costs were up 7.0% over the month, and airfares rose 2.7%, after a 7.0% increase in May. Energy prices rose 1.5% in June, including a 2.5% increase in gasoline prices. Food prices rose 0.8% over the month.

On a year-ago basis overall inflation was 5.4% in June, with core inflation of 4.5%, the fastest pace since 1991. However, this overstates inflation, because prices declined in March and April of 2020 when the pandemic came to the U.S. The overall CPI was up 4.7% in June from February 2020, before the pandemic, with the core CPI up 4.2% over the same period. Used car prices were up an astonishing 45% in June from a year earlier, rental car prices were up 88%, and auto insurance was up 11%. On the flip side, medical care costs were up a scant 0.4% in June from a year ago.

The headline inflation numbers have been eye-popping in recent months, but underlying inflation remains under control. Once again a few categories—used vehicles, airfares, rental cars, hotels—are experiencing huge price gains because of the recovery from the pandemic, and once again comparisons with weak prices a year earlier are overstating inflation. Both factors will wash out of the data in the near term. Used car prices are temporarily elevated because of very strong demand from stimulus payments, people returning to work, and limited supplies of new cars; used car supplies are also very low. Used car prices will fall back to earth later this year as new car production picks back up.

Similarly, airfares will decline as the airlines add capacity. And gasoline demand has picked up more quickly than supply as people return to work and start traveling again, but eventually higher prices will induce more oil production, resulting in lower energy prices. Also, comparisons with the period of very weak prices in the early stages of the pandemic will fade from the data, slowing inflation on a year-over-year basis.

Monthly inflation will be much slower in the second half of 2021 than in the first half of the year as demand pressures from the economic reopening fade and supply starts to catch up as businesses increase production. Year-over-year inflation will also be softer in the second half of the year. The Federal Reserve has made it clear that it views the current high inflation as due to transitory factors and will not tighten monetary policy until inflation is consistently at or above 2%, excluding one-time factors. (The Fed uses a different price index, the personal consumption expenditures price index, which tends to run a bit slower than the CPI.) PNC does not expect the next increase in the fed funds rate until mid-2023.

The big concern is that current high inflation gets built into consumers’ and businesses’ expectations, leading to higher long-run inflation, as happened in the 1970s. However, the temporary nature of current inflation pressures, and Fed watchfulness, should prevent this from happening.

Faucher is PNC's Chief Economist.